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The user of this material, by using this material, agrees that the courts at Delhi shall have the exclusive
jurisdiction to adjudicate any suit, petition or other legal proceedings arising out of or in relation to this
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The material has been made with due care but still, some mistakes might have crept in. The readers are
advised to exercise caution while reading the material.

If the students need any clarifications or have any suggestions, for the improvement of material contained
herein, they may contact the author at:-

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www.taxationwithsahiljain.com

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 Ch-1 : Overview of Income Tax Law
Taxes are levied by government to meet the COMMON WELFARE EXPENDITURE of the society like defence,
education, health-care, infrastructure etc.

² Direct Taxes vs Indirect Taxes:- (Read after finishing syllabus)

Direct Taxes
Levied on income/wealth of a person
Person bearing the cost of such taxes” and “Person
paying such taxes to the govt.” are SAME
Burden of tax CANNOT be shifted to others
Progressive in nature, i.e. High Rates for people
having higher capacity to pay
Eg:- Income Tax, Tax on undisclosed foreign
income and assets.
Indirect Taxes
Levied on the price of goods/service
Person bearing the cost of such taxes” and “Person
paying such taxes to the govt.” are DIFFERENT
Burden of tax CAN be shifted to others
Regressive in nature, i.e. Same Rates for everyone
irrespective of capacity to pay
Eg:- GST/ Customs Duty

² Power to enact Income Tax Act:-

The Constitution of India is the SUPREME LAW of India. POWER to levy and collect taxes whether, direct or
indirect emerges from the Constitution of India. In case any tax law, be it an act, rule, notification or order
is NOT in CONFORMITY with the Constitution, it is called ULTRA VIRES the Constitution and is illegal and
void.

Article 265 of Constitution provides that “No tax shall be levied or collected EXCEPT by authority of law(i.e.
Law needs to be framed to do so)
”.

Seventh Schedule to Article 246 of Constitution of India contains 3 LISTS which enumerate matters on
which the Parliament and State Legislatures have authority to make laws.
2
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Lists in Seventh Schedule

Union List State List Concurrent List

Parliament has the EXCLUSIVE State Legislature has the BOTH Parliament and State
power to make laws on matters EXCLUSIVE power to make laws Legislature can make laws on
contained in this list. on matters contained in this list. matters contained in this list.

Parliament has a FURTHER power to make any law for any part of India not comprised in a State even if
such matter is included in the State List.

Entry no. 82 of the Union List has given Parliament, the power to make laws on “Taxes on income OTHER
THAN agricultural income.”

AAA case y
and
Parliament
in madeby
Laws applicable

are
² Components of Income Tax Law:-
F.tt eI
It extends to the whole of India. It came into force on 1st April 1962 and contains
Income Tax
Sections 1 to 298 and XIV Schedules. It is amended annually by Finance Acts and also
Act, 1961
by multiple OTHER Acts like Taxation Laws (Amendment) Act.

Finance BILL is "passed by BOTH houses of parliament AND receives assent of

President" to become Finance ACT. It amends multiple acts including Income Tax Act.

First Schedule to Finance Act contains 4 parts as follows:-

Annual
Components of Income Tax Law

Finance Act
Part I - Rates for current AY(Such rates are used for computing Tax liability of current AY)
Part II - TDS Rates for current FY(They are used in cases where TDS section requries deducting tax at "rates in force")
Part III - Rates for next AY(Such rates are used for computing "TDS on Salaries and Advance Tax")
nom Part IV - Rules for computing Net Agricultural Income(i.e. for Partial Integration of Ag. Income)
su In a lot of Sections in any Act, you will find that certain things have been "Prescribed".
Income Tax These things can be found in corresponding Rules. CBDT is empowered to make RULES
Rules, 1962 for proper ADMINISTRATION of Income Tax Act. These RULES cannot take away
provisions of act nor whittle down its effect.
Circulars are issued by CBDT to guide assessees & officers for following purposes:-
a) Deal with specific problems
b) Clarify doubts w.r.t scope and meaning of certain provisions of the act.

Circulars/ Department is Bound by Circulars but assessee is not.

Notifications Notifications are:-
1) Issued by CG to give effect to provisions of Act
2) Issued by CBDT to make/amend Income Tax Rules

notes Notifications are binding on BOTH dept. & assessee

see
Legal decisions
Only those matters go to court on which LAW is SILENT/AMBIGUOUS
Decision of Supreme Court is considered Law of Land(i.e. SC Judgement is as good as something
of courts written in Law)

Decisions of High courts apply in their respective jurisdiction

Section 2
see posts of
Note:-
gag
1) In case of any Act, where PARTS of a Section are INDEPENDENT of each other and not related, such
PARTS of Section are called “Clause”. However, IF such PARTS are related with other and ALL of such
parts taken together complete a concept propounded in that section, THEN, such PARTS are called
“Sub-sections”. seepals
A section may also have Provisos and Explanations. A PROVISO spells out the EXCEPTION(s) to
Lag of
section23

provision contained in Section/Sub-Section/Clause. An EXPLANATION gives a CLARIFICATION relating

to provision contained in a Section/Sub-Section/Clause.
2) Similarly, Rules can also have sub-rules, provisos and explanations.
 Hypothetical situation to explain importance

offulesinotificationet sution
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It Rules 1962 Shall be paid within 2 months
of
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Notification the lottery income shall be

me 1202
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 GIL 3 Central Board of Indirect Taxes
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1
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men the bill
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 CBDT Pass a notification
passing
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Act to change an Act

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² Concept of Income under the Income Tax Act, 1961
Even IRREGULAR/CASUAL incomes like Winnings from lotteries, crossword puzzles etc., are taxable

"BULK purchase followed by bulk sale or series of retail sales" or "Retail purchases followed by
bulk sales" during the PY can constitute business IF there was intention to resell and earn profits

Transactions entered IN the course of business with the

Taxability of Income

intention of earning profit are called Revenue Receipt

They are chargeable to income tax
Eg: Sale of shares by a share broker

Transactions entered into OUTSIDE the normal course of

business are termed as Capital Receipts
Eg:-
1) Sale of shares by Real estate broker.
2) Receipt of Liquidated Damages on DELAYED
Procurement of a Capital Asset.
3) Receipt of Loan/Capital
4) Gifts
These are generally not chargeable to
income tax unless SPECIFICALLY taxed by
the income tax act.
Eg:-
a) Capital Gains u/s 45
b) Incomes u/s 28(ii)(c) / 56(2)(x) / 56(2)(xi)

ILLEGALITY of a business does NOT exempt its profits from tax

Note:- It is not possible to lay down any “single test as infallible” OR any “single criterion as decisive,
final and universal in application” TO DETERMINE whether a particular receipt is capital or revenue in
nature. Hence, the capital or revenue nature of the receipt must be determined with reference to the
facts and circumstances of EACH case.

Some of the factors for determining whether a receipt is capital or revenue in nature is mentioned
below:-
1) Fixed capital or Circulating capital:-
“A receipt referable to FIXED capital” would be a “CAPITAL receipt” whereas “a receipt referable to
CIRCULATING capital” would be a “REVENUE receipt”. The former is NOT taxable while the latter is
taxable.

Tangible and intangible assets which the owner keeps in his possession FOR making profits are in the
nature of “FIXED capital”. The “CIRCULATING capital” is one which is “turned over AND yields income
or loss in the process”.
2) Income from transfer OF capital asset or trading asset:-
“Profits arising from the sale OF a capital asset are chargeable to tax as capital gains u/s 45” whereas
“profits arising from the sale OF a trading asset being of revenue nature are taxable as income from
business u/s 28 PROVIDED that the sale is in the regular course of assessee’s business or the
transaction constitutes an adventure in the nature of trade”.
3) Transaction entered into the course of business:-
Profits arising from transactions which are entered into IN the course of the business regularly carried
on by the assessee, or are incidental to, or associated with the business of the assessee would be
REVENUE Receipts chargeable to tax.
4) Profit arising from sale of shares and securities:-
In the case of profit arising from the sale of shares and securities the nature of the profit has to be
ascertained from the motive, intention or purpose with which they were bought. IF the shares were
acquired as an investor or with a view to acquiring a controlling interest or for obtaining a managing
or selling agency or a directorship the profit or loss on their sale would be of a capital nature; but IF
the shares were acquired in the ordinary course of business as a dealer in shares, it would constitute
 i
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7 Illustrative Definition
Like Includes
Means
Exhaustive Definition
 his stock-in-trade. IF the shares were acquired with speculative motive the profit or loss (although of a
revenue nature) would have to be dealt with separately from other business.

² SOME of the important definitions:-

If any SPECIFIC definition is given to a word in the Income Tax Act, we use that definition only. However, if
the word has NOT been defined in the whole act, we can refer General Clauses Act or Dictionary meaning.
1) Assessee [Section 2(7)]:- see notes
Assessee MEANS a person by whom any “tax or other sum of money” is payable under the Income Tax
Act. In addition, it INCLUDES:-
F Penalty Interestetc
A) Every person in respect of whom any proceeding under this Act has been taken for the assessment
OF:-
i) his income;
ii) the “income OF any other person” in respect of which he is assessable;
iii) the loss sustained “by him OR by such other person”; OR
iv) the amount of refund due “to him OR to such other person”
B) Every person who is DEEMED to be an Assessee under any provision of this Act;
C) Every person who is DEEMED to be an Assessee-in-Default under any provision of this Act.
2) Assessment [Section 2(8)]:-
This is the procedure by which the income of an assessee is determined by the Assessing Officer. It
may be by way of a normal assessment or by way of reassessment of an income previously assessed.

Types of income-tax assessment:-

A) Self-assessment u/s 140A
B) Summary assessment u/s 143(1)
C) Scrutiny assessment u/s 143(3)
D) Best judgment assessment u/s 144
E) Re-assessment or income escaping assessment u/s 147
3) Income [Section 2(24)]:-
Section 4 levies charge under the Income Tax Act on “INCOME”. “Income is defined u/s 2(24)”.
However, since the definition is an INCLUSIVE definition and NOT an EXHAUSTIVE definition, we need
not learn it separately as even those incomes not specifically mentioned u/s 2(24) CAN BE construed
to be income. (Read Section 2(24) from Bare Act)
4) India [Section 2(25A)]:-
I India MEANS:-
covered
Ust A) Territory of India as referred to in Article 1 of the Constitution;
with B) Its territorial waters, seabed and subsoil underlying such waters;
C) Continental shelf;
D) Exclusive economic zone; OR
 E) Any “other maritime zone as referred to in the Territorial Waters, Continental Shelf, Exclusive
Economic Zone and other Maritime Zones Act, 1976” AND the “air space above its territory and
territorial waters”
5) Assessment Year [Section 2(9)]:-
It MEANS a period of 12 months commencing on 1st April of every year.
SunosInterlinking:- Income earned in a Previous Year is taxable in immediately following year which is called
Assessment Year.
6) Previous Year [Section 3]:-
It means the FY immediately preceding the AY.

Exception:- In case of a “business/profession newly set up OR a source of income newly coming into
existence”, in the said financial year, the previous year shall be the period BEGINNING with the “date
of setting up of the business/profession OR the date on which the source of income newly comes into
existence” RESPECTIVELY and ENDING with “31st March of the said financial year”.

² Miscellaneous Topics:-
1) Section 4 is the CHARGING SECTION(i.e. Section that levies the charge of tax on assessees) of Income Tax Act. It provides
that “Income-tax is a tax levied on the total income of the previous year of every year of every
person.”

It also provides that such tax shall be levied at the rates prescribed for the year by the annual Finance
Act.

This section is the back bone of the law of income-tax in so far as it serves as the most operative
provision of the Act. The tax liability of a person springs from this section.
taxauthorities
2) As a thumb rule, remember that whenever anything is done by authorities which is against the
interest of assessee, assessee will have to be given a REASONABLE OPPORTUNITY OF BEING HEARD
before doing such act. Eg:- Before passing assessment order or penalty order OR before rescinding any
approval granted to assessee etc.

² Process of computing Income Tax:-

All of the following are done in a chronological order:-
1) Determine Residential Status of the assessee Income Revenue Expenses
2) Classify the income of assessee under 5 heads.(Because govt. has identified different rules for allowance of expenses under
various heads to ensure that only genuine expenses are being claimed)

3) Compute the income under each head as per provisions of the act.
4) Club income of spouse/minor child etc. with the income of assessee.
5) “Set off” OR “Carry forward and set off” of LOSSES to be done.
6) Arrive at Gross Total Income. 356,892.81
7) Subtract Deductions from the GTI to arrive at Total Income. 256,890
Note:- As per Section 288A, “Total Income” shall be rounded off to nearest multiple of 10. For this
purpose, “part of rupee consisting of paise shall be IGNORED”, thereafter, if the amount is NOT a
multiple of 10:-
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 A) If the last figure is 5 or more, amount shall be increased to next HIGHER amt. which is multiple of
10; OR
B) In any other case, amount shall be reduced to next LOWER amt. which is multiple of 10.
8) Apply the tax rates applicable on each component of Total Income
9) Increase/Decrease the tax so computed by Surcharge/Rebate/Marginal Relief etc. . Then, add HEC of
4% to arrive at the “Tax Liability”.
10) From “Tax liability”, subtract the “Advance Tax paid/ TDS/ TCS etc.” to arrive at final “Tax Payable or
Refundable”.

Note:- As per Section 288B, “Tax Payable or Refundable” shall be rounded off to nearest multiple of 10
in the same way as is done u/s 288A.

² Presentation Tips:-
1) You do NOT have to necessarily write the Bare Act language in the exam. Refer the bare act language
of any Sections and then see how ICAI has presented them in its material to reassure yourself that
modifying the language a bit to make things simpler is allowed till the time you don’t change the
intent/meaning of the provision.
1) Throughout this material, you will observe that important stress words are highlighted by
CAPITALIZING them and certain sentences are put in between Inverted Commas. This is done to help
you understand and learn the provisions in a more effective manner. Do not use such capitalization or
inverted commas while writing answers in exam.

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